Alaska Sues Mercer For $1.8 Billion

[Abnormal]

For anyone that thinks pensions are boring:

Alaska Sues Mercer For $1.8 Billion Alleging Errors

The state of Alaska has sued Mercer, a unit of Marsh & McLennan Cos. (MMC), for $1.8 billion in damages, alleging that the company, which was the actuary for two of its pension funds, miscalculated liabilities of the schemes in the face of booming health-care costs.

The state has alleged that Mercer, which used to be the actuary for Alaska's $ 11.4 billion Public Employees' Retirement System and $5.2 billion Teachers' Retirement System schemes, used mistaken actuarial assumptions and methods about future health-care costs, as well as "basic mathematical and technical errors".

The funds had a combined liability of $8.4 billion at the end of June.

Talis Colberg, attorney general acting on behalf of the state, said: "Mercer was required to use due care, skill and diligence in advising the state how to keep its retirement plans financially sound. When it came to calculating expected health-care costs for the plans, and in other areas, Mercer failed to meet those standards and caused a significant part of the current unfunded liability of the plans."

Mercer responded Thursday in a statement which said that the funding problems of the two schemes was a result of economic factors including skyrocketing medical costs, a downturn in capital markets and that employees are living longer and retiring earlier than expected.

It added: "Accordingly, beginning in 2002, Mercer advised the state to significantly increase its contributions to the retirement systems. The state is now attempting to hold Mercer accountable for these economic trends, over which our firm has no control."

It is rare for a pension fund to sue an actuary. In 2005, the San Diego city attorney sued its pension fund's investment consultants Callan including actuaries as defendants. The case was settled in December last year with no admission of liability by Callan.

In the same year, investment consultancy and actuary Watson Wyatt Worldwide Inc. (WW) was sued by the Credit Lyonnais Group Management Pension Scheme for miscalculating its funding position. The case was eventually dropped. That February, Mercer won a case in a U.K. court of appeal also alleging a false actuarial valuation on a client's pension fund.

Pension funds have also been active in the courts this year, taking both ratings agencies and fund managers to task for the collapse of vehicles with exposure to US sub-prime debt.

A unit of U.S. insurer Prudential Financial Inc. (PRU) filed a lawsuit against subsidiaries of State Street Corp. (STT) over $80 million in losses from investments that included subprime mortgages.

[Mark Cavazos]

I wonder what is the basis for the amount of damages.

After I left Mercer, a former client sued them for mistakes that they made. The former client wanted the unfunded liability as damages. Mercer admitted to the mistakes, but said that no damages were done since the liability is what it is. If Mercer had done the valuations correctly, the former client's required contributions would have been higher.

I suspect that Mercer would use a similar argument. Mercer's action did not create liability; different assumptions would have only accelerated the State's contributions.

[SirVLCIV]

Originally Posted by Mark Cavazos

I wonder what is the basis for the amount of damages.

After I left Mercer, a former client sued them for mistakes that they made. The former client wanted the unfunded liability as damages. Mercer admitted to the mistakes, but said that no damages were done since the liability is what it is. If Mercer had done the valuations correctly, the former client's required contributions would have been higher.

I suspect that Mercer would use a similar argument. Mercer's action did not create liability; different assumptions would have only accelerated the State's contributions.

You miscalculated the amount of our required contribution by 10%. Now pay up 100% of our unfunded liabilities!

Sometimes, the world makes no sense.

[Kenshiro]

Originally Posted by Mark Cavazos

I wonder what is the basis for the amount of damages.

After I left Mercer, a former client sued them for mistakes that they made. The former client wanted the unfunded liability as damages. Mercer admitted to the mistakes, but said that no damages were done since the liability is what it is. If Mercer had done the valuations correctly, the former client's required contributions would have been higher.

I suspect that Mercer would use a similar argument. Mercer's action did not create liability; different assumptions would have only accelerated the State's contributions.

I'm not certain that's a bad argument to make. If the actuary has for years been making a mistake that caused them to significantly understate the liabilities, there should be some obligation. Fixing the mistake and paying any penalties would be a minimum. Paying the entire unfunded liability would seem excessive, but I can certainly see arguments towards a paying a portion of it.

The client often relies on the actuary to tell them what to contribute. If you tell your client that they need to make $x a year contribution to meet their goal, and you find out you've been making a mistake the entire time and it should have been $2x, what should your obligation be?

[AggieAct02]

I would think that you could go back to the point of the error, recalculate the funding position, and then the obiligation to the actuary could be the shortfall in the contributions that should have been made and any penalties and interest. That could add up pretty quickly depending on the shortfall and how many years the mistake went unnoticed. I do think that the total unfunded is extreme given that the majority of plans today have some level of unfunded liability.

I read an article in the news today that Hewitt is getting sued for some misallocations of settlements from the Enron pension plan. I guess that no matter how good (or bad) you do your job that there are people who want to assign blame when things don't go as expected.

[asdfasdf]

WW selling off their public sector wing doesn't seem so far fetched given this. If a plan is ongoing there really should be no liability due to the actuaries miscalculations, unless they were blatant fraud. On termination things get stickier because no more money is flowing into the pot, but in an ongoing plan it's all guesswork until the last member dies.

[Kenny]

This assumes the assumptions were inappropriate at the time. Based on what is in the OP

used mistaken actuarial assumptions...about future health-care costs

it appears the Plan is saying Mercer did a poor job of predicting the future, so now it is Mercer's job to pay us for that. We can't look back and say that assumption was wrong so you need to pay us the difference between the assumption and the experience.

As for Enron, Hewitt did screw up. They calculated individual benefits incorrectly because they used the wrong historical stock price to calculate the allocation of individual gains. That is completely different than being wrong about assumptions of the future.

[tymesup]

It is possible that if Mercer had come up with higher contributions, Alaska would have adjusted their plan(s) to provide lower levels of benefits. To that extent, Alaska may have been damaged.

My old boss used to tell clients how every time we do a valuation, we get something wrong and have to do it all over again next year. I wonder if he still does that or if the lawyers have gotten to him.

Puzzling that the article refers to "Retirement System" for both plans in the same sentence with future health-care costs.

[IAm@Work.com]

Originally Posted by tymesup

... Puzzling that the article refers to "Retirement System" for both plans in the same sentence with future health-care costs.

Why is this puzzling? Is it because you cannot imagine a pension plan that provides health insurance as part of the benefit? Would it help if you remembered that these are state plans and not corporate plans where anything that costs too much or is hard to quantify has been removed?

[Former Actuarial]

Originally Posted by IAm@Work.com

Why is this puzzling? Is it because you cannot imagine a pension plan that provides health insurance as part of the benefit? Would it help if you remembered that these are state plans and not corporate plans where anything that costs too much or is hard to quantify has been removed?

what is puzzling is the hostility i am sensing in the tone of your post.